Labor Market Models of Worker and Firm Heterogeneity

Posted: 18 Oct 2010

See all articles by Rasmus Lentz

Rasmus Lentz

University of Wisconsin - Madison

Dale T. Mortensen

Northwestern University - Department of Economics; IZA Institute of Labor Economics

Date Written: April 2010

Abstract

Microeconomic data on individual firms and employer-employee matches reveal substantial and persistent dispersion in firm size, productivity, and average wage paid and a positive correlation between each pair. To the extent that intrinsic differences in firm productivity explain these facts, there are several important consequences. First, the reallocation of employment from less to more productive firms will yield efficiency gains. Second, workers will find it in their interest to seek out higher-paying employers. Recent research has provided support for both hypotheses. Third, the existence of worker and employer heterogeneity offers possible gains from sorting. However, because the problem of identifying the presence of sorting is model dependent, it is too early for conclusions about its significance.

Suggested Citation

Lentz, Rasmus and Mortensen, Dale T., Labor Market Models of Worker and Firm Heterogeneity (April 2010). Annual Review of Economics, Vol. 2, pp. 577-602, 2010, Available at SSRN: https://ssrn.com/abstract=1693054 or http://dx.doi.org/10.1146/annurev.economics.102308.124511

Rasmus Lentz

University of Wisconsin - Madison ( email )

Department of Economics
1180 Observatory Drive
Madison, WI 53706-1393
United States

Dale T. Mortensen

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8230 (Phone)
847-491-7001 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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